Current turmoil on the buy-to-let marketGiven the recent turmoil in the market, the one area that seems to be hit hardest as a result of the Government’s recent Mini-Budget/fiscal event is the buy-to-let market.
I’m conscious of writing anything about the measures announced in this however because we’ve already had a number of u-turns, and literally as I’m writing this, Liz Truss has sacked her Chancellor. Will any of these measures see the light of day? Who knows, but you might credibly argue that the damage has already been done and it will be sometime before we see a return to a pre-Mini Budget environment.
So, what of buy-to-let? Well, it would be too easy to describe it as similar to the famous Norwegian blue parrot as per the old Monty Python sketch, that is dead, perhaps it is more like how the shopkeeper described it in the sketch – “resting”.
Post-fiscal event, 39 lenders almost immediately pulled buy-to-let products from their propositions, and as of today, a few have returned. Those that have, increased their rates substantially, but as importantly also increased their stress rates, rental calculations and brought in high product fees ranging from 2% up to 5%.
It’s an interesting move as you cannot help but think maybe this is all about having a presence in the market as opposed to a sellable proposition that allows advisers and their clients to secure finance and a product that meets their immediate needs today.
Already we have seen lenders return with stress testing at 8.49% and others now requiring landlords wanting a five-year fix rate to show they can afford an interest rate of 7.44%.
I would therefore suggest the buy-to-let market is under pressure like no other sector in housing. The positive being that landlord borrowers/property investors probably need advisers like never before.
They will be feeling the pressure, worry and stress in a number of areas, notably:
- Fears the property bubble might burst.
- Taxation increases.
- Abolishment of Section 21 – a policy where there has apparently been a u-turn of a u-turn.
- The Green agenda, EPC levels and when they need to be met.
- The rise of build to rent.
- And of course rising interest rates, which have probably only just started.
The Sunday Times reported: ‘Under Nat West’s old stress rate of 5.1%, a borrower could take out an interest-only loan at 68% LTV with a £400k value, while earning £20k in rent. At the new rate of 7.44%, the LTV drops to 46%, and to get the same LTV ratio the rent would need to increase by £9,200 pa.’
Given the above, therefore, it seems the product transfer market will be busy for a while. Overall, there is still clearly a buy-to-let market – limited company BTL can still work, plus, there could be a market for advisers’ clients who might be cash buyers, as there could be some distressed sales happening. Therefore there is business to be done and client communication is vital here, regardless of whether your landlord borrowers need guidance in the short or medium term.
Hopefully, the issues in the buy-to-let market are a short-term issue as lenders try and work their risk and funding scenarios out. The importance of this sector can not be underestimated, underlined by the fact findings from the English Private Landlord Survey say more than half (54%) of landlords in England are using buy-to-let properties as a ‘long-term investment to contribute to their pension’.
Additional analysis from Savills reveals retirement-age households own 1,491,000 buy-to let-properties worth an estimated £437 billion. When deducting outstanding mortgage finance, these properties add £378bn to the net wealth of these households. Savills further report that, despite tougher conditions for landlords, the use of property as a pension is only expected to grow, with those approaching retirement expecting property will be their biggest source of retirement income.
The available evidence would suggest landlords have not left the market in recent years, while the overall size of the PRS has stagnated in recent years, it does not appear to have shrunk. Further data from UK Finance shows the continued growth in net lending with most of the largest lenders (by gross lending flows) increasing their exposure to the market in 2020/21.
For those who feel the halcyon days of buy-to-let are over because of some of the aforementioned issues just by looking at the need for income outside of pension provision means staying with it in the short and medium term could pay off for both advisers and their clients.